Is the market starting to tank? Or is it just a seasonal slowing? I’m getting asked this question all the time, so I wanted to share some thoughts. Then I have a big local market update for anyone interested.

How would you know if the market was sliding? I wish this was a 10-second answer, but it’s a big conversation, so let’s unpack some thoughts.

1) Change in inventory: It’s normal for housing inventory to increase as a market begins to cool for the season, but when a market starts to make a big turn we’d likely notice new listings aren’t being absorbed and the number of listings keeps growing beyond a normal pace.

2) Change in sales volume: Sales volume usually slows down as the market cools, but during a big shift we’d expect to see a more substantial change in sales volume over time. I’m talking about a market where buyers put on the brakes and properties stop selling. Currently in many areas throughout the country we’re seeing some smaller changes in sales volume. Could it be the start of something? Sure. But in my mind we need more time to see if this is a consistent pattern or just a slower end of the year.

3) Word on the street: What are people saying? How does the market feel in the trenches? We can learn so much when talking with informed local buyers, sellers, agents, appraisers, and other real estate professionals. Ask things like, “What are you seeing out there?”, or “What’s the market doing?” This is important because before we see a change in stats we’ll hear of change in the trenches. As an FYI, here’s a Twitter poll from a few days ago.

4) Less pendings: When a market starts to slide we can expect to see less pending sales, which is a big sign of waning demand. Let’s just remember though around this time of year we usually see fewer pendings as the market cools. This means we have to be cautious about saying the market is crashing just because pendings soften. My advice? Look for abnormal changes beyond a regular seasonal dip in pending sales.

5) Price changes aren’t the big issue: When a market shifts directions we often look to prices to tell us if things are changing, but it takes time for prices to catch up with the trend. For example, in Sacramento in 2005 we saw housing inventory triple and sales volume drop 43% in one year. Yikes! Those are insane stats, but price changes weren’t all that dramatic during this time period.

6) Other metrics: Lots of experts say to watch the number of new homes built as an indicator of the market changing. That’s huge. Others say it’s the GDP or economy, easy credit, housing affordability index, or flux capacitor sales (kidding on that one). There are definitely important indicators out there, and we should tune in, but for a local market I might suggest paying the most attention to inventory, sales volume, and the word on the street. If new construction is booming in your market though, definitely watch that too.

7) A closing dating analogy: Just like a dating relationship needs time to figure out what it’s going to be become, the same thing happens in real estate. Right now in many areas of the country we’re seeing inventory increase and sales volume starting to slump. At the least these are signs of a slowing market for the season, but it also makes us wonder if it’s something more. What does it really mean? Where will things go? The truth is we don’t fully know yet because the future hasn’t happened and we need more time to see how things unfold. I realize that’s frustrating to hear, but it’s honest.

CLOSING TIPS:

1) Crystal balls: If you don’t have a crystal ball that works, be careful about making very specific real estate predictions.

2) Watch local data closely: More than ever it’s critical to watch local data. Lots of articles are talking about “national” trends, but what’s happening locally?

3) Don’t just regurgitate headlines: It’s easy to read headlines and let the titles become our talking points. Be careful of that since headlines are designed to get clicks and they may or may not reflect the market.

4) Know the season: It’s not always easy to understand what a market is doing at this time of year when things usually slow down. My advice? Understand normal seasonal trends by studying past years. What does the market normally do at this time of year? This will help us spot normal vs abnormal trends.

I hope that was helpful.

—–——– Big local monthly market update (long on purpose) —–——–

The market has been slowing for the past few months in Sacramento. We’re seeing what we’d expect to see at this time of the year like softer prices, more price reductions, a lower sales-to-list price ratio, and it’s taking longer to sell. We’ve had a hefty uptick in housing inventory though, and that’s something to watch – especially if it continues over time (that would be a problem). But for context, housing inventory is actually still historically low, so it’s not like we have a crazy high level right now. Some have wondered if the market is a bit stalled right now, but sales volume is still looking pretty strong and so are pendings. But I’d say there is some shock in the market because of the rise in inventory. Keep in mind one of the problems is so many sellers are overpricing, and that only makes inventory increase because these properties end up sitting instead of selling. On the other hand homes that are priced well are moving quickly, and 48% of all sales in the region last month had more than one offer. So despite a slowing narrative, the market isn’t painfully dull either.

JULY 2017 vs JULY 2018: So how did this past month do? One of the ways we find the answer is to compare last month with the same month in 2017.

JUNE 2018 vs JULY 2018 (NEW CHARTS): The problem is if we only look at July this year versus July last year, we’ll miss what the market is doing right now. So that’s why I have new charts to show the previous month vs the most recent month. But there’s still an issue because if we only look at this chart and don’t understand that the market normally softens around this time of year, we might walk away with the idea that the market is utterly tanking when it’s normal to see inventory increase, sales volume decline, etc… Look at graphs below to help see seasonal changes (or check out this older YouTube video where I talk about seeing the seasonal market).

SALES VOLUME: One of the things we need to watch is sales volume because if we start to see a trend of slumping sales, it could be a sign the market is in trouble. The truth is we’ve technically had a couple of months in a row of lower sales volume in the region. But volume was only off by 4% in June and it was barely off at all this past month (which is why I said “technically”). When you really look at it, sales volume this year in 2018 so far has been stronger than last year. But when we look at the past 12 months as a whole it’s clear volume is down (still only slightly though). Ultimately volume is not crashing right now based on the stats, so let’s be careful about saying it is.

NOTE on Trendgraphix: I have some thoughts on the way Trendgraphix is pulling stats. This month their stats show sales volume in Sacramento County is down by 6%, but that’s not accurate. I can explain why if anyone wants to know. And I love Trendgraphix. What an incredible resource. I just find when we’re looking at the market carefully in a time like this, it’s critical to know how the numbers work.

2005 vs CURRENT: In case you wanted to compare current price metrics with 2005, here you go. A couple of months ago I talked about peak prices because some metrics were showing 2005 levels. But with the market softening right now we’ll expect over the fall season to see current prices grow further apart from the “top” so to speak.

It’s been an utterly devastating fire season in California, so I wanted to talk about what happens on the appraisal side of things after such a disaster. This isn’t something that people ever think about until they have to, but now is one of those times. I figured this would help home owners with questions and it would help give real estate professionals a resource to dig deeper.

Today I’m interviewing Penny Woods, an appraiser colleague based out of Pleasanton CA with 30 years of experience (see bio below). Penny knows her stuff and she has vast experience with post-disaster appraisals.

Ryan: Tell us about your experience with post-disaster appraisals.

Penny: In October 1991 the Oakland firestorm totally destroyed 2,800+ single family homes and an additional 400+ townhomes. I worked for an appraisal fee office that had a major insurance company as a client with over 500 total loss properties. For the next 7+ months one other appraiser and I did nothing but retrospective fair market valuations for structures that were completely destroyed. At that time, insurance policies were written and paid out on “Market Value”, but this fire changed that. Now they are written and pay out based on “Replacement Cost”.

Ryan: When is an appraisal ordered after a disaster?

Penny: Appraisals after a disaster can be ordered at different times for different reasons. When it is safe to return to the fire damaged property the insurance company will start the process to get their replacement cost (Cost Approach) valuation. Additional appraisals may be needed by the property owner following the insurance company’s initial replacement cost valuation for: property tax assessment reductions, to challenge/rebut the insurance valuation, IRS causality loss tax claims, or for other types of civil litigation.

Ryan: How does an appraiser value a home if it is no longer there?

Penny: As with any retrospective valuation, some of the research is exactly what the appraiser would do for any assignment and some of it is very different. Data sources include: public tax records; planning department plans and permits; old MLS listings; the lender may be willing to provide an old appraisal, the data collected by the insurance company, an in-depth talk with the property owner; and don’t forget family photos! Yes family photos are usually still available at the homes of grandparents, aunts & uncles, and family friends. You’d be amazed how much information is available in a photo from Johnny’s birthday party or a holiday dinner.

Ryan: What date of value is used during the appraisal?

Penny: The initial appraisal is a retrospective valuation, which means the value is usually for the day immediately before the fire loss. Any subsequent appraisals may use the same retrospective date or post fire dates depending on the use/purpose of the valuation. An appraisal for a property tax reassessment would use a date after the property had been damaged. This could be the day after the fire or a more current date depending on the assessment dates. To challenge/rebut the insurance company’s valuation would require the same retrospective valuation date used by the insurance company. If the property owner needed to provide information to the IRS for a casualty loss claim there would be 2 valuations, “immediately before” and “immediately after”. The IRS “immediately before” value is the retrospective before the fire and the “immediately after” date can mean up to 2 years from the date of the loss to allow for time for the general clean up and/or recovery. If there was additional civil litigation the date or dates would be specific to the cause of action.

Ryan: What type of information does the owner need to provide to the appraiser?

Penny: As much as possible!!! Appraisers, for you to be able to complete a credible appraisal you need to have as much information from the property owners as they can provide. This could be a difficult process because you will be working with people who are in a very emotional situation. Be patient, and professional. Understand that if you are doing a lot of this type of work it may also become a very emotional and/or stressful situation for you too.

Ryan: Does the appraiser focus on the value of the structure or the land too? In other words, what is the insurance company really asking for?

Penny: The insurance company is looking for the value of the onsite structures that have been destroyed. The land is still there and not insured so the insurance company only wants the value of the structures. With the other types of valuation assignments we have been discussing it is a case by case situation, some will need separate land valuations and some won’t.

Ryan: What did you see happen to the market in Oakland during the big fire in the 90s? Did it collapse, stall, decline, etc…?

Penny: The Oakland fire occurred in October of 1991. This was a time throughout the country where the economy was in a decline. In the Bay Area the decline could be tracked from the Loma Prieta earthquake in October 1989 and continued through the mid 1990’s. It is difficult to say how much of the decline that occurred in the Oakland and Berkeley Hills was directly related to the fire and how much was the overall declining market trends. There was also a unique situation where the majority of the properties that before the fire had nice wooded views or little “peeks” of the San Francisco Bay suddenly had partial to full bay views! That alone increased the value of these properties. It was a slow process to rebuild, a total of 700 permits for new construction had been issued 1 year later and none of them had actually started to build. Again some of that could certainly be attributed to the overall economy. I believe that each market will react differently depending on the extent of devastation and the specific economy of the surrounding area.

Ryan: Any advice you’d give to owners who just lost a home?

Penny: While your life is certainly disrupted beyond most of our imaginations, don’t rush! Be sure you know what all of your options are before taking any major steps. Consult professionals in each of the fields where you have questions and need information and help.

Ryan: Any advice for appraisers too?

Penny: These disasters could be a large source of potential business. You must first remember that you are benefiting from other people’s major losses, so always be as professional as possible! Not every appraiser has the temperament to take on this type of work, but it can also be very rewarding helping the fire survivors rebuild their lives even if it doesn’t involve a move to a different location.

Ryan: Thanks so much for doing the interview. You killed it. Everyone, if you need an appraiser in Penny’s area, please reach out to her.

Penny’s Bio: B. Penny Woods, owner of BPW Appraisal & Realty Service based in Pleasanton, CA, has been working as an appraiser for the past 30 years, coming from a background of property management and real estate sales. She got her start in appraising by working for a fee appraisal firm; obtaining appraisal experience with both residential and small commercial properties. In 1994 she started her own firm and now does only residential appraisal work. Penny specializes in the unique and unusual properties, completing assignments for lender financing, probate, divorce, estate planning, litigation & expert witness testimony, earth movement, fire damage, and insurance claims. Penny’s phone #: 925-485-0641

I hope this was helpful and interesting.

Questions: Do you have any questions? Any stories to share? How have you seen the market change after a fire or disaster? I’d love to hear your take.

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